Green bonds, Brussels-based ones will cost more in paperwork

Other obligations relate to the reporting model, i.e. the information the issuer must provide to the market. Well, on this point the EU is more demanding: there is a disclosure sheet to be published before the green bond is issued. Furthermore, reports on the use of the proceeds, of what has been raised on the market, must be published every 12 months until the entire amount of money has been allocated. On these two points there is enough alignment with Icma. The real novelty concerns the report on the impact of European green bonds; a document absent from the Icma scheme and which, instead, Brussels-based green bond issuers must publish at the end of the full allocation of proceeds and at least once during the life of the green bond.

Finally, the last major difference between the two green bond schemes concerns the external reviewers, i.e. those who carry out an independent assessment of the reports produced by the issuer on the green projects to be financed. The new European regulation, first of all, requires that external reviewers must be registered with Esma, the supervisory authority for European financial markets; Esma also, of course, carries out the supervision of such entities.

This assessment is mandatory on the green bond fact sheet and the reports on the allocation of money; it is voluntary for the impact report. For Icma, on the other hand, external verification is recommended not imposed. Among other things, as mentioned at the beginning, there are no sanctions for issuers. Instead, the EU regulation provides for specific sanctions in addition to supervision by an authority over the issuer's activities (in Italy, Consob).

Needless to add, the obligations under EU law entail compliance costs for the issuers of green bonds and for the auditors themselves: for the former, there are the mandatory impact reports, expert advice on taxonomy and the external auditors themselves. For the latter, there are the costs of registering with Esma. Against this, however, there are more controls to guarantee green investors. Who will win the challenge in the market?

The differences between Brussels and Icma

In this fact sheet produced in cooperation with the Milan-based firm Galbiati-Sacchi Associati, the main differences between European-regulated green bonds and those that instead comply with the Icma guidelines, the international capital market association, the so-called Green Bond Principles, are highlighted.

The EU Green Bond Regulation 2023/2631 (Eugb) establishes a mandatory framework to be adopted by companies wishing to issue 'European Green Bonds' or 'Eugb'. In contrast, the Icma Green Bond Principles (Gbp) are voluntary guidelines.

The economic activities of the company financed by the green bond must be aligned with the requirements of the European Taxonomy Regulation 2020/852 and its delegated acts (the taxonomy is the classification of economic activities into green and non-green). The Icma guidelines, on the other hand, cover a broader range of activities financed by the company and do not oblige compliance with the European taxonomy rules.

The disclosure of European green bonds foresees a specific template consisting of: a) bond information sheet to be published prior to issuance; b) report on the allocationof proceeds every 12 months until the sums are fully utilised; c) impact reports to be published after the proceeds are fully allocated and at least once during the life of the bond.

The Icma rules also require a pre-issue report as well as an update on the use of proceeds until full allocation. In contrast, the requirement for impact reports is absent.

In European green bonds, assurance, i.e. the control of an external reviewer, is mandatory on the documentation that the issuer is required to publish during the life of the bond to provide information to the market. In particular, there is an obligation of the external reviewer on the information sheet and on the allocation reports is mandatory. In contrast, the assurance on the impact reports is voluntary. Furthermore, the external reviewer must be registered and supervised directly by Esma, the financial market supervisory authority.

Icma, on the other hand, recommends but does not impose external verification. This verification is carried out by operators who are not subject to any form of registration for authorisation and supervision by specific authorities.

The European green bond regulation provides that issuers of such financial instruments are supervised by a special authority appointed by each member state (in Italy it is Consob) and are subject to a specific sanctioning system. Icma, on the other hand, does not provide for any public supervision of issuers or specific sanctions. The only sanction is a possible 'betrayal' of market confidence, which will then penalise the issuing company.